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Financial crime and investigations update for UK corporates

10 October 2017

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The law and practice relating to financial crime and investigations is evolving fast. In the past 18 months we have seen two new Acts aimed at combatting financial crime (including the creation of two new corporate criminal offences), the implementation of the Fourth Money Laundering Directive, new case law, guidance from investigating authorities, the first few Deferred Prosecution Agreements under the Bribery Act 2010 and government consultations on plans to extend corporate criminal liability further. This is a high level overview of these developments for UK companies.

Legal reform

Government expands corporate liability for financial crime

The UK Government is keen to expand corporate criminal liability. The Criminal Finances Act 2017 contains two new strict liability corporate offences of failing to prevent the facilitation of UK or non-UK tax evasion. Modelled on the section 7 Bribery Act 2010 ‘corporate offence’, the new tax offences put corporates under increased pressure in relation to the behaviour of their employees, agents or anyone providing a service for or on behalf of the company.

The new offences catch both UK and foreign companies (who do business in the UK) and apply to UK and non-UK tax evasion. There is a dual criminality requirement for the non-UK tax evasion offence – both the tax evasion, and the facilitation, must be offences under the relevant non-UK law and English law.

The new offences came into force on 30 September 2017. If they have not already done so, businesses need to start planning now to manage the risks of these strict liability offences, and take advantage of the only real defence available – that of having reasonable prevention policies and procedures in place. There is also a defence that it was not reasonable to expect the company to have such procedures in place but in reality it will be reasonable for all but the smallest of businesses to have reasonable prevention procedures. The UK Government has stated that it expects rapid implementation with companies expected to have a clear timeframe and implementation plan on entry into force of the new offences. Read more.

The UK Government is also considering whether to expand criminal liability further by having a new offence of failing to prevent any type of financial crime. We are currently awaiting the outcome of a Government Call for Evidence on a number of potential options for reform. Read more.

Investigations

UK investigating authorities, both criminal and regulatory, are taking an aggressive stance to claims of legal professional privilege. The English court is also taking a restrictive approach to the meaning of ‘client’ (for the purpose of legal advice privilege between client and lawyer) and the application of litigation privilege in the context of criminal investigations. It can now be hard to claim privilege over internal investigation documents, especially employee interview notes. This has put companies in a difficult position.

On the one hand, good governance and regulatory obligations (if applicable) may require companies to investigate allegations of misconduct and the Deferred Prosecution Agreement (DPA) regime encourages companies to self-report and co-operate. However, recent privilege rulings are making it increasingly difficult for companies to obtain legal advice and investigate matters without producing material that could subsequently be used against them in a criminal prosecution. Read more.

The investigations process creates legal barriers between the corporate and its employees

The legal and practical position in relation to compelled interviews of employees, who may be of interest in a criminal or regulatory investigation, has become more complex. The interests of the company and the witness may not always be aligned. In its June 2016 guidelines the SFO sets out its position on when a lawyer may be present at an SFO interview of an employee, and tries to limit what a lawyer can do or say at such interviews. Following the publication of the guidelines, the SFO has increasingly sought undertakings from lawyers representing individuals. The Law Society has issued guidance on how lawyers (both external and in-house) can navigate the controversial SFO guidelines, whilst at the same time complying with a lawyer’s own professional conduct rules. No other UK investigating authority has yet taken the same approach as the SFO.

The use of independent legal advisers for employees is likely to increase. Where the company is a suspect, or likely suspect, there is less chance that the company’s lawyers will be able to attend an SFO interview of an employee. This is notwithstanding that an employee may wish to and may benefit from having legal representation regardless of whether he or she is likely to become a suspect personally in the investigation. There are serious consequences for an interviewee who does not comply with the statutory requirements of section 2 Criminal Justice Act 2003, including possible prosecution and imprisonment. It may also be in the company’s interests for an employee to be represented separately at a section 2 interview. Where a company’s lawyers interview employees in the context of an investigation, difficult privilege issues may arise (see above).

DPAs can create complications for individuals who are prosecuted separately. A DPA will contain an agreed Statement of Facts drafted by the company which will affect the position of such individuals.

Companies have little power to challenge delays in investigations

Bribery investigations typically last many years and can affect a company’s reputation, business and ability to raise finance. It is difficult to exercise control over the timing of an investigation. Soma Oil and Gas Ltd brought judicial review proceedings in an attempt to force the SFO to stop its long-running corruption investigation into allegations regarding Soma Oil’s conduct in Somalia.

While expressing sympathy with Soma Oil’s position and exhorting the SFO to proceed as expeditiously as possible, the High Court held that the claim had no real prospect of success and refused to grant permission to proceed. The court reiterated that there was ‘a very high hurdle’ to be overcome by applicants seeking to challenge decisions of investigators. Although the legal challenge failed, the proceedings may have prompted the SFO to issue a letter informing Soma Oil that it had insufficient evidence of criminality for any realistic prospect of conviction in relation to the primary aspect of the investigation. Shortly thereafter the SFO announced that it had closed its investigation. Read more.

The SFO has concluded four DPAs with companies and obtained one conviction under the UK Bribery Act 2010 in relation to the ‘corporate offence’ (see table below). The DPAs, together with public statements made by the SFO, have provided information about what conduct it expects from companies wishing to avoid criminal prosecution and instead be offered a DPA. The SFO expects genuine co-operation, including disclosure of the results of internal investigations, making witnesses available and extensive disclosure of relevant documents (including accounts of witness interviews). The SFO continues to place considerable weight on genuine self-reporting, although the Rolls Royce DPA illustrates that a failure to self-report may not be fatal to the possibility of negotiating a DPA, depending on the extent of any subsequent co-operation. Read more.

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Proceeds of crime

Extended moratorium period for money laundering reports

If a company suspects that it is, or may become, involved with criminal proceeds it can make a Suspicious Activity Report or a Consent to Defence request to the National Crime Agency (NCA) in order to comply with its money laundering obligations or mitigate its money laundering risks. The Criminal Finances Act 2017 gives the NCA a much longer moratorium period (increased from 31 to a maximum of 186 days) in which to investigate requests following an initial denial of consent. The relevant provisions are expected to come into force this Autumn.

Changes to disclosure of beneficial ownership regime

Complicated offshore company and trust arrangements can be legitimate but can also be used by money launderers to layer and integrate the proceeds of crime into the economy. Companies are therefore coming under increased pressure to disclose beneficial interests. In April 2016 the UK introduced the ‘Persons with Significant Control’ (PSC) register showing beneficial ownership of UK companies where the company meets certain conditions for example, Parliament recently rushed through changes to this regime in order to implement the Fourth Money Laundering Directive by the deadline of 26 June 2017. Key changes include a new 14 day time limit for notifying any change to a company’s PSC register and the scope of the regime has been broadened to cover more companies, including AIM and ISDX Growth Market companies.

The UK Governmentwants to extend the register to any foreign company that already owns or is buying UK property, or that wants to bid on a UK Government contract. Recent legislative attempts to force increased transparency of company ownership in the UK’s overseas territories and Crown dependencies failed, although the Criminal Finances Act 2017 provides for a future statutory review of transparency in these territories.

Financial sanctions – new penalty regime

A new monetary penalty regime for the breach of financial sanctions was introduced in April 2017. Penalties may be imposed on companies and company officers. The maximum corporate penalty is the greater of GBP 1,000,000 or 50% of the estimated value of the funds or economic resources that are the subject of the breach. The new regime, together with the creation of the Office of Financial Sanctions Implementation, and new powers under the Policing and Crime Act 2017, mark a renewed focus on the enforcement in the UK of financial sanctions. Read more.

Cybersecurity

On 21 December 2016, the UK Government published its ‘Cyber Security Regulation and Incentives Review’ which considered whether there is a need for additional regulation and incentives to boost cyber risk management. The Review concluded that no additional regulation is required beyond the implementation of the new European General Data Protection Regulation, which will come into force on 25 May 2018 and will replace the existing regime under the UK Data Protection Act 1998 (with significant new obligations around breach notification and fines). The UK Government is clear that it is ultimately for companies to manage their own risk in respect of sensitive data and online presence. However, the UK Government will pursue non-regulatory interventions to incentivise better cyber risk management, which will mostly be delivered through National Cyber Security Centre advice and guidance.

On 7 June 2017, the European Commission published its ‘Reflection paper on the future of European defence’, which signalled the EU’s intention to increase its role in directing cyber security policy and responses across its Member States. The Paper suggests that common defence and security arrangements would allow the EU to coordinate responses to cyber attacks and allow greater information sharing, technological co-operation and joint doctrines on cyber threats.

Impact of Brexit on UK financial crime framework

much of the impetus for the UK’s financial crime legal framework is the result of its commitments to and pressure from international organisations such as the Organisation for Economic Co-operation and Development, the United Nations and the Financial Action Task-Force;

directly effective EU law or English law that implements EU law will likely be replaced by mirroring English laws to avoid any legal vacuum, and also to ensure that UK businesses continue to have access to European financial markets under the principle of equivalence; and

there is mutual benefit for the UK and EU Member States to carry on intelligence-sharing and co-operation.

Allen & Overy LLP’s market-leading global investigations practice advises clients on a wide range of high-profile criminal and regulatory investigations, with a particular focus on cross-border matters. The global team comprises lawyers with extensive experience of working together in multiple jurisdictions and includes former prosecutors in the U.S. and Europe.